Very little written about how start-ups can and should negotiate with potential investors in Malaysia
The process and experience of settling on investor terms can more often than not be painful.
A LOT has been written about getting investors interested in start-ups. However, very little has been written about how start-ups can and should negotiate with potential investors in Malaysia.
A few people recently asked me for tips on how they could save themselves from common issues or complications, and I thought maybe I should just share my thoughts with Digital News Asia readers.
Given that I do have some experience making a living in my previous life fumbling around with term and Excel sheets, I thought I could share a few pointers about dealing with the ‘wheeler dealer’ types in Kuala Lumpur.
While investors are important when companies need to move forward with their growth and expansion plans, the process and experience of settling on investor terms can more often than not be painful.
Not to worry though, with some of these pointers I am sure you would be up sparring ‘pre-emption rights’ with investors sooner than you can say “kontrek”!
Here are some areas you may want to consider if you’re looking to raise any sort of equity financing:
There is no such thing as ‘standard’ terms.
This excuse, given by potential investment managers or lawyers, is a pet peeve of mine. A contract by any design is never ‘standard’ -- more so if it’s an equity investment agreement.
Every investment deal is and should be different (we are not taking up a mobile phone contract here), so if someone tells you a particular clause is standard, you should cheekily ask them if you could be the exception.
Also take note that term sheets you rip off from websites from the United States may not have terms which are applicable in Malaysia.
As a founder try not to agree to any liability clauses that are personal in nature.
One cannot be faulted for claiming investor terms in Malaysia seem to have been adopted from a template drafted by Shakespeare’s Shylock.
More often than not there are ‘puts’ or ‘terms’ made to founders to personally buy the investors’ shares back at a price when things don’t work out.
Personal guarantees are also another common one. I have yet to see one where they ask for your first-born though – but you never know.
Whatever they are, one may want to try to avoid these sorts of exposure unless they have to do with punitive terms pertaining to negligent or fraudulent actions by the founders.
Don’t be too excited when someone expresses an intention to put in money or acquire you.
In Malaysia, it’s common to get approached by people who seemingly have money or a ‘listed’ company which intends to acquire your company.
More than often than not, these are a passing fancy for those ‘interested parties,’ or browsers who are just snooping about. Since everyone is some sort of deal-maker (beware the Mr 20%s who are brokers), you may be coerced into doing corporate deals that don’t make sense and end up distracting you from your true objective in building your business – that is to make money.
Don’t bother about selling your company unless you’re very clear about the opportunity and if real cash upfront is on the table.
Never, ever do equity swap deals where the acquirer is dangling promises to go public. You could grow old holding on to worthless equity.
Please make sure the ‘investors’ have committed capital or have existing invested companies.
Talk is cheap and it’s quite easy to say you are from Fund X and represent a billion-dollar fund, (By the way, I have the hell notes to prove it too).
Entrepreneurs should do the extra homework or ask questions that would indicate if these investors have invested in real companies – saves you a ton of time talking to phonies.
Don’t get your uncle who is the ‘loyar burok’ to act on your behalf.
[‘Loyar burok’ is a derogatory Malaysian term denoting someone with possibly some legal knowledge, but no real professional qualification – ED]
Doing venture capital type or private equity deals require a specific legal skill set – selling equity to investors is not the same as selling your condo!
Familiarity with common early stage investment instruments and terms and business implications is usually required. Unfortunately, these skills are as common as a dugong
(the sea cow) and getting someone who is not experienced can do more damage than good.
Try to get someone who has experience acting for both investor and investee.
If you would like to know more about fund raising or pitching, you can attend the next Startup Pitch Bootcamp organized by the Founder Institute KL with Jeffrey Paine from Golden Gate Ventures and myself on March 14 2013.
Find out more here -- http://fi.co/e/2306
Chu Tzu Ming is currently a co-director and mentor at Founder Institute Kuala Lumpur
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